Markets are playing an eye on the expected US inflation numbers for May. Simultaneously, volatility in the NZD/USD cross is starting to emerge as a result of the continuing US-China trade negotiations. The US Dollar (USD) – the United States’ official currency – occupies a critical space in this narrative. Its role as the world’s reserve currency since World War II makes it all the more important. Analysts expect that the inflation figures, along with the trade negotiations, will significantly influence currency trading, particularly for the Kiwi dollar.
US inflation rate expected to skyrocket in May. This acceleration is sure to play a role in shaping future monetary policy, which will ultimately affect the value of the USD. The USD is considered the ‘de facto’ currency of choice in dozens of countries. This extensive adoption in tandem with local currencies greatly heightens the risk for market fluctuations due to volatility. The data traders are most focused on this week is the Consumer Price Index (CPI). This key gauge of inflationary pressures may trigger the next big move of the US Dollar.
Economic Indicators and Their Implications
The current inflationary climate in the United States has made that a very important topic, since inflation is highly correlated with interest rates. The Federal Reserve (Fed) uses interest rate hikes and cuts as its main lever to control inflation and stabilize the economy. Similarly, when inflation drops too far below the 2% target or when unemployment rates soar too high, the Fed can decide to reduce interest rates. These types of decisions usually put downward pressure on the USD, rendering it less appealing to investors.
Against this backdrop of these positive dynamics, the next CPI data for May is highly anticipated by market participants. Market analysts are betting that higher-than-expected inflation rates would strengthen belief in a solid economic recovery. The net effect of this shift will be to put upward pressure on the USD. If the Fed sees an indication that inflation is weakening, they could shift to a more dovish position. That would really harm the dollar’s value.
The expected publication of this data also comes at a particularly fraught moment in America’s trade relationship with China. The result of these negotiations will have enormous implications for both countries’ economies, as well as for the strength of each of their currencies. Though New Zealand is more dependent on its exports to China than any other country. Therefore, any change in trade relations between the two superpowers will most certainly affect commodity to NZD/USD currency pair.
The Role of Trade Talks
As new rounds of negotiations continue between the US and China, investors are still deeply worried about what may come. Renewed investor confidence may be strengthened with positive market developments, but negative news may heighten market volatility. The NZD/USD pair is now ranging near 0.60500 in early EU trade. This action is a sign of investor jitters, as they anxiously await signals coming from the current round of trade negotiations.
The New Zealand economy is highly vulnerable to any changes in the trade picture with China. Around 20 percent of New Zealand’s total exports now head to the Asian giant. As you can imagine, the effects of a trade policy shift or an increase in tariffs would instantly affect New Zealand’s economy. So traders are hanging on the heels of the US-China trade meetings minutes for clues as to where the next trade storm lies.
Aside from external factors, domestic monetary policy is a huge influence on where NZD/USD trades. In its last policy meeting this past May, the Reserve Bank of New Zealand (RBNZ) took a historic step. They cut the OCR (Official Cash Rate) by 25 basis points to 3.25%. This decision is a clear signal of commitment to promote new economic development, even in challenging economic times. It’s all creating the foundation for how the NZD is trading today.
Market Reactions and Future Outlook
The current trading environment suggests a tight range for the NZD/USD pair, oscillating around 0.6050 as investors remain cautious ahead of critical economic updates. In fact, the average daily turnover in USD is about $6.6 trillion. This figure further illustrates the currency’s recent dominance in global foreign exchange markets and makes the just-released CPI data all the more critical.
With traders eagerly awaiting CPI print along with the results of U.S./China trade negotiations, market reactions will be carefully examined. A significantly hotter inflation report would likely be bearish for the CNY and supportive of the USD. Conversely, further signs of deterioration in trade relations could be negative for both the USD and the NZD.